Tight cost controls boost Best Buy's profit

Dhanya Skariachan

4 Min Read

(Reuters) - Best Buy Co Inc (BBY.N) reported its first quarterly profit in a year after keeping a tight lid on costs, further confirming that Chief Executive Officer Hubert Joly’s turnaround plan for the world’s largest consumer electronics chain is working.

Holiday shoppers wait outside Best Buy in preparation for Black Friday shopping during Thanksgiving Day in San Francisco, California November 22, 2012. REUTERS/Stephen Lam

The news, which boosted Best Buy shares as much as 13 percent to three times their price at the end of 2012, came a year after the restructuring expert took the helm of the company.

Under Joly, Best Buy has lowered costs by removing layers of management, cutting jobs and closing some stores. It has also announced plans to shed noncore assets such as its stake in a European joint venture with Carphone Warehouse CPW.L.

The efforts have boosted Best Buy’s bottom line even as the company tries to reverse sales declines and fend off cutthroat competition from the likes of Wal-Mart Stores Inc (WMT.N) and Amazon.com Inc (AMZN.O).

Joly told Reuters he saw more room to cut costs, but stressed that he would focus on saving money on goods sold rather than on reducing headcount.

The company has been matching rivals’ online prices and dedicating more space to faster-growing products such as smartphones and tablets.

Best Buy is doing “some degree” of same-day delivery in some U.S. markets, Joly said. On Tuesday, it said it planned to extend its “ship from store” test to more than 200 locations in time for the holiday season.

The company has also invested in employee training, store revamps and its website.

Wall Street has cheered Best Buy’s decision to let vendors such as Samsung Electronics (005930.KS) and Microsoft Corp (MSFT.O) run their own boutiques within the retailer’s stores, saying this has helped solve such problems as excess square footage, customer service and pricing pressures.

While Best Buy is in talks with other vendors, Joly said he did not expect the stores to become just a collection of boutiques.

Net earnings rose to $266 million, or 77 cents a share in the second quarter ended August 4 from $12 million, or 4 cents a share, a year earlier. Excluding a host of items, including certain legal settlements and a gain on the sale of Best Buy Europe, the company earned 32 cents a share, while analysts on average expected 12 cents.

“Best Buy’s much better-than-expected second-quarter results further highlight the continued progress management has made under its Renew Blue turnaround plan,” BB&T Capital Markets analyst Anthony Chukumba said. “We find the results even more stunning given the myriad store disruptions and investments.”

Best Buy’s efforts to become more price-competitive and product warranty-related costs squeezed gross margin, but the 30-basis-point decline was less steep than what many on Wall Street expected.

Sales fell 0.4 percent to $9.30 billion, but topped the analysts’ average estimate of $9.13 billion, according to Thomson Reuters I/B/E/S. Sales at stores open at least 14 months fell 0.6 percent, including a 0.4 decline domestically.

The company attributed the lower domestic same-store sales to “short-term disruptions,” including the rollout of the Samsung and Microsoft Windows boutiques.

“The Windows stores-within-the-stores take several days to install,” Best Buy spokesman Matt Furman said.

Best Buy shares were up 9.3 percent at $33.59 in afternoon trading after rising as high as $34.65 earlier in the day.